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Chaos and the Stock Market May Be Set to Collide
Contemplate what's ahead for the markets BEFORE it happens

By Bob Stokes
Thu, 10 Jan 2013 12:45:00 ET
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To err is human.

This truism is conspicuously true of financial markets -- especially when human error meets the limits of modern technology.
 
Bob Prechter elaborates.
 
Trading stocks, options and futures could be extremely problematic during a stock market panic. One reason is that trading systems tend to break down when volume surges and the system’s operators become emotional. ....
 
Do you think the experience will be 'smoother' because modern computers are involved? I don’t. ... Investors will be so nervous that they will screw up their orders. Huge volume will clog website servers, disrupting orders entered on-line. Orders may go in, but confirmations may not come out. A trader might not know if his sale or purchase went through. Is he in or out? Quote systems will falter at just the wrong time. Phone lines from you to the broker and from the broker to the floor will be jammed, and some will go down. Computer technicians will be working overtime while being distracted worrying about their own investments. Brokers will be operating on little sleep and at peak agitation, since most brokers are themselves bullish speculators. They will be entering orders wrong. ... Price gaps will trigger stops at prices beyond the ability of some account holders to pay.
 
Conquer the Crash, second edition, pp. 190-191
 
Prechter wrote those words well before the May 6, 2010 "flash crash." As you may recall, that's when the Dow plunged about 600 points in just minutes. The market had already been down around 300 points. The Dow did regain much of the 600 points before the session closed.
 
A Securities and Exchange Commission and Commodities Futures Trading Commission joint investigation revealed that the flash crash was fueled by large mutual fund selling and high-frequency trading.
 
The long-awaited report ... detailed how high-frequency algorithmic trading can sap liquidity and rock the marketplace.
 
Reuters, Oct. 1, 2010
 
Now consider three separate yet recent instances, when markets have been relatively calm.
 
A single mysterious computer program that placed orders — and then subsequently canceled them — made up 4 percent of all quote traffic in the U.S. stock market last week, according to the top tracker of high-frequency trading activity. The motive of the algorithm is still unclear.
 
CNBC, Oct. 8, 2012
 
Glitch prevents trade in over 200 stocks on the NYSE
 
Reuters, Nov. 12, 2012
 
NYSE Server Failure Interrupts Market Data on 165 Securities.
 
Wall Street Journal, Jan. 8, 2013
 
Imagine the potential chaos during the next severe market decline.
 
The latest Elliott Wave Theorist and Elliott Wave Financial Forecast have alerted subscribers to what to expect for stock prices in the months ahead.
 

 



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